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Could banning credit history checks hurt minority job applicants?

A recent research study has cast doubt on the theory that the unemployment rates of minorities will decrease if employers cannot screen applicants by credit history.  There has been discussion among lawmakers around the country about legislation that would prohibit employers from considering credit history when they hire employees.  Some places have already passed such laws.  A bill has been debated in the Maine legislature in recent years that would place limits on when employers could consider credit history.  The rationales for such legislation are normally (1) minority applicants, particularly African American applicants, tend to have worse credit than white applicants and/or (2) credit history is a poor indicator of how good of an employee an applicant will be and, thus, it does not make sense to let employers access applicants’ private financial information.  However, this recent study, performed by an economist from the Federal Reserve and a professor from Harvard, shows that minority employment rates actually decreased in states that instituted bans on credit history checks.  So, what gives?

To understand these results, one of the researchers who conducted the study explained that “employers have many screening measures to narrow down who they want to hire” and “if you take one away, they’ll put more weight on the others.”  When a law eliminates one screening method, such as credit history, employers put greater emphasis on other screening methods.  Employers use credit history as a proxy for personality traits such as trustworthiness.  Without credit history as a proxy, some employers may just fall back on impressions gleaned from interviews where unconscious bias against minorities can more heavily influence hiring decisions.

Does this mean that legislators should not pass laws that prohibit consideration of credit history in hiring decisions?  Not necessarily.  There is still ample evidence that credit history is a poor indicator of whether an applicant will be a good employee and, thus, it is unnecessary for employers to intrude upon applicants’ private financial information.  With respect to minority employment, this study shows that unless other measures are taken to combat systemic barriers to minority employment, just focusing on the disparities in credit histories will not improve minority employment and, at least according to this study, might make it worse.